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A
Accounting tricks, 13
Accumulation phase (stage 1), 107–109, 134
Active traders, 93
Aggressive orders, 204–206
Amex Oil Index (XOI), 46
Analysis:
foundational, 85
fundamental, 165–179
opinion vs., 61
personal responsibility for, 180
sector, 44–58
top-down, 17
Analysts, 8–9
corrupt practices of, 10–12
indirect influence by, 210
information leaked to, 11, 171, 172
Anger, 87
Angle of attack, 111
Anticipation, buying based on, 110–111
Arbitrage, 89
Ascending triangles, 144
Asian Flu, 47
Average daily volume, 189
Average directional indicator, 161
Away market price, 206
B
Bear markets, 4
rallies, 116
selling (shorting) weak sectors in, 44
Bid price, 205
Bond futures, 38
Bond market, 31–38
and dollar price, 51
and pricing of bonds, 31–32
rate structure in, 35–38
stock market influenced by, 19
and yields vs. price of bonds, 33–35
Bonds, 31
interest rate on, 31
interest rates on, 34
pricing of, 31–32
yields of, 33–35
Bottom-up analysis, 57–58, 199
Break, 83
Breakdowns, 122–126
Breakouts, 122–126
Broad equity markets, 26–31
Dow Jones Industrial, 26–28
Nasdaq Composite Index, 30
Nasdaq 100 Index, 30–31
S&P 500, 28–30
Buffet, Warren, 170
Bull markets:
buying leading sectors in, 44
stock price increases in, 4
Business cycle, 16–25
components of, 18–19
defined, 17
emotions underlying, 17
Fed control of swings in, 18
and fiscal policy, 22–24
influences on, 44
and monetary policy, 24–25
patterns in, 19–22
primary players in, 23–24
Buy recommendations, 10–11
Buy rumor, sell fact, 65, 267–274
identifying price patterns, 268–273
professionals’ approach to, 267–268
and timeframe of engagement, 272
“Buy side” firms, 209
C
Call money rate, 35
Candlestick patterns, 155, 158–160
classic hammer, 159
gravestone doji, 158
momentum, 154–157
white vs. shaded, 73
Carter, Jimmy, 173
CBOE (see Chicago Board of Options Exchange)
CBOT (see Chicago Board of Trade)
CFO (see Chief Financial Officer)
CFTC (Commodity Futures Trading Commission), 38
Charles Schwab, 10
Charts, 66–73
line, 68–70
point and figure, 66–68
weekly, 182–185
Chicago Board of Options Exchange (CBOE), 53, 54
Chicago Board of Trade (CBOT), 38, 212
Chicago Mercantile Exchange (CME), 212, 214
Chief Financial Officer (CFO), 169–170
Chinese yuan, 47
Churning, 114
Circle of profitability, 12
Classic hammer candlestick pattern, 159
CME (see Chicago Mercantile Exchange)
Coincident indicators, 20–21
Commercial paper rate, 35
Commissions:
broker, 8
financial firms/institutions, 9
Commodities, 39–43
Commodities futures, 212
Commodity Futures Trading Commission (CFTC), 38
Consolidation patterns, 137–139
Consumer Price Index (CPI), 172–173
Continuation patterns, 137–147, 262–263
consolidation, 137–139
triangles, 144–147
Contraction, 18
Corporate disclosures, 13, 167–168
Cost of slippage, 189
Coupon rate, 31
CPI (see Consumer Price Index)
CRB Index, 43
Creative accounting, 170
Crude oil futures contracts, 40–41
Currencies, 47–50
D
Daily chart, 182, 183, 185, 186
Data, 61–85
charting, 66–73
distorted, 169–171
economic, 65
elasticity (range) of, 77, 81–85
filtering, 174–179
government bias in reporting, 172–173
raw market, 62–63
and technical analysis, 64–66
trust in, 61
Day traders, 93
De Moivre, Abraham, 87
Dead cat bounce, 20
Debt, federal, 22–23
Decision making, emotions in, 86–87, 231–232
Decline phase (stage 4), 114, 116–118, 134
Deficit spending, 22
Demand, 89 (See also Supply and demand)
Department of Economics, University of Minnesota, 19
Derivative futures, 212–213
Descending triangles, 144, 146, 147
Directional bias, 199–200
Disclosures, corporate, 13, 167–168
Discount brokerages, 10
Discount rate, 35
Distorted data, 169–171
Distribution phase (stage 3), 111, 113–115, 134
Division of Corporate Finance (SEC), 167
Division of Enforcement (SEC), 167
Division of Investment Management (SEC), 167
Division of Market Regulation (SEC), 167
DJI Average (see Dow Jones Industrial Average)
Double tops and bottoms, 146, 148–150
Dow Jones Industrial (DJI) Average, 26–28, 212
correlation of S&P 500 with, 29
Dow Utilities as leader of, 46
and oil prices, 46
Dow Jones Utility Average (UTY), 45–46
Downtrends, 128, 129, 148, 152 (See also Decline phase (stage 4))
order flow for, 203–209
reaction to economic news by, 65
E
Earnings (net income), 167–168, 175, 265–267
leaking information about, 171
price-to-earnings ratio, 175–178
pro forma, 170
reporting of, 266
terms used with, 266
p> <p class="indexof, 266–267
ECNs (Electronic Communication Networks), 9
Economic process, 16–17
Economists, traders vs., 23
Elasticity:
bearish, 83–85
bullish, 81–83
Electronic Communication Networks (ECNs), 9
Electronic trailing stops, 238, 240–242
E-Mini S&P 500, 214
Emotions:
control of, 61
decisions based on, 86–87, 231–232
and electronic trailing stops, 240
underlying business cycle, 17
Entering a trade:
accuracy in, 120
goal of, 101
Equities, Dow Utilities as leading indicator of, 45
Example, trading, 215–230
analyzing overall market, 215–218
filtering information, 217, 219
identifying individual stock, 222, 225–229
sector analysis, 222–224
taking action on analysis, 227, 230
Exit strategies, 231–244
electronic trailing stops, 238, 240–242
events motivating, 232
gaps against prevailing trend, 234, 236, 237
hard-trailing stops, 236, 238, 239
initial protective stops, 233–235
moving average crossovers, 242–243
price targets, 236
time stops, 244
F
Fannie Mae (see Federal National Mortgage Association)
FDIC (Federal Deposit Insurance Corporation), 5
Fear, 87
in decline phase, 114
in downtrends, 128
in markup phase, 111
and velocity of trading, 99
Fear Index (VIX), 53–57
Fed (see Federal Reserve)
Federal debt, 22–23
Federal Deposit Insurance Corporation (FDIC), 5
Federal funds rate, 35
Federal Home Loan Mortgage Corporation (Freddie Mac), 52–53
Federal National Mortgage Association (Fannie Mae), 52, 53
Federal Open Market Committee (FOMC), 18
Federal Reserve (Fed), 17–18
control by, 18
CPI and adjustments by, 173
policies of, 24–25
Filtering:
of data, 174–179
Financial firms/institutions:
“buy side” vs. “sell side,” 209–210
commissions of, 9
information revealed to, 11
manipulations by, 171–172
order flow for, 209–211
Fixed income market (see Bond market)
Fixed income security, 31
Flattening (yield curve), 35
FOMC (Federal Open Market Committee), 18
Food chain of market information, 6–7, 14, 65
Forecasters, 19
Form 10-Q, 168
Foundational analysis, 85
Freddie Mac (see Federal Home Loan Mortgage Corporation)
Fundamental analysis, 165–179
and bias of government, 172–173
in bottom-up investing, 57–58
and distorted data from companies, 169–171
filtering data in, 174–179
and financial institution manipulations, 171–172
information used in, 166–167
and manipulation of information, 167–174
for short squeezes, 252–254
Futures, 211–214
bond, 38
commodity, 39
defined, 211
shorting, 213
taxes on gains on, 213
G
Galbraith, John Kenneth, 19
Gaps against prevailing trend, 234, 236, 237
GDP (see Gross Domestic Product)
GLOBEX, 214
Gold, 51
Government:
bias of, 172–173
deficit spending by, 22–23
fiscal policy of, 22–24
monetary policy of, 24–25
Treasury bonds/notes, 31
Grain futures, 212
Gravestone doji candles, 158
Greed, 86–87
Gross Domestic Product (GDP), 18–19
H
Hard-trailing stops, 236, 238, 239
Head and shoulders patterns, 148, 151–153
Henley, Don, 171
Herd Mentality, 182
Housing market, 53
I
Index tracking funds, 30
coincident, 20–21
interest rates as, 37–38
leading, 20
moving averages as basis for, 130
stochastic, 161–163
Information:
availability of, 180
disclosure of, 167–168
in fundamental analysis, 166–167
keeping mind open to, 176–177
leaked to analysts, 11
manipulation of, 167–174
sources of, 180
Initial margin, 213
Initial protective stops (IPS), 233–235
Initial Public Offerings (IPOs), 7, 10–12
Inside information, 11
Institutional clients (see Financial firms/institutions)
as broad market indicators, 37–38
and dollar price, 50–51
and market direction, 35–36
and prices, 36–37
short-term, 19
yields vs., 33
International trade, 47, 49–50
Intraday volatility, 91
Inverted head and shoulders pattern, 148, 152
Investment bankers, 7
Investors:
blind investment decisions made by, 15
defined, 93
and mutual fund scandal, 15
order flow for individuals, 203–209
relationship between money manager and, 4
IPOs (see Initial Public Offerings)
IPS (see Initial protective stops)
J
Japanese Candlestick Charting (Steve Nison), 160
Japanese candlesticks, 152 (See also Candlestick patterns)
L
Lane, George, 162
Leading indicators, 20
Levitt, Arthur, 170
Lift the offer, 205
Limit orders, 207
Line charts, 68–70
on stage 4 stock, 118
stops for, 233
M
Macro-level market analysis, 16, 17
Manipulation of information, 167–174
and bias of government, 172–173
by companies, 169–171
and disclosure requirements, 167–168
by financial institutions, 171–172
and stock price, 168–169
Margin, trading on, 213
Market analysis:
building blocks of, 62–63
overall, 215–217
Market data (see Data)
Market impact cost (MIC), 189, 205–206
Market orders, 204, 209 (See also Order flow)
Market principles, 16
Market profile, 68
Market stages, 104–118
accumulation (stage 1), 107–109
decline (stage 4), 114, 116–118
distribution (stage 3), 111, 113–115
markup (stage 2), 110–112
Market Wise, 248
Market(s), 26–43
bond futures, 38
broad equity, 26–31
commodities, 39–43
Dow Jones Industrial, 26–28
fixed income (bond), 31–38
movement of, 182
Nasdaq Composite Index, 30
Nasdaq 100 Index, 30–31
S&P 500 Index, 28–30
Markup phase (stage 2), 110–112, 132, 134
MAs (see Moving averages)
“May Day,” 9
McGinley, John R., Jr., 46
Media, 24
MIC (see Market impact cost)
Momentum candles, 154–157
Monetary policy, 18, 24–25, 173
Money flow, 57
Money management, 3, 15, 275–279
Money manager, relationship between investor and, 4
Mortgages, 52–53
Moving averages (MAs), 128, 130–135
adjusting period of, 130, 134, 135
and market stage identification, 132–134
as support levels, 234
for trailing stop orders, 130, 132
Mutual fund scandals, 13–14
N
Nasdaq Composite Index, 30, 185
Nasdaq 100 Index (NDX), 30–31, 54, 57, 212
Natural gas futures contracts, 40–42
NDX (see Nasdaq 100 Index)
Negative yield curve, 34
Net income (see Earnings)
New York Board of Trade, 47
New York Mercantile Exchange (NYMEX), 40, 42
New York Stock Exchange (NYSE), 45, 203
News, 24 (See also Buy rumor, sell fact)
Nison, Steve, 160
Normal distribution, 87–88
“Not held,” 210
NYMEX (see New York Mercantile Exchange)
NYSE (see New York Stock Exchange)
O
OEX options, 54
Offer price, 205
Office of Federal Housing Enterprise Oversight (OFHEO), 52
Oil prices, 46
Open-market operations, 24–25
Opinion, analysis vs., 61
Options, 54
Order flow, 202–214
defined, 202
for individual investors, 203–209
institutional, 209–211
with single source liquidity vehicles, 211–214
Oscillators, 161–164
moving averages as basis for, 130
stochastic indicator as, 161–163, 253, 255–265
Overbought/oversold securities, 161, 162
P
Passive orders, 206–207
Patterns:
consolidation, 137–139
continuation, 137–147, 262–263
double tops and bottoms, 146, 148–150
head and shoulders, 148, 151–153
price, 268
psychology behind, 103
trends vs., 137
triangles, 144–147
P/E ratio (see Price-to-earnings ratio)
Peak, 18
Point and figure charts, 66–68
Positions:
built on fundamentals, 166
exiting (see Exit strategies)
sizing, 93–94
Positive yield curve, 34
Premiums, 32
Present value (PV), 32
Price targets, 236
Price(s), 90–91
of bonds, 31–32
with breakouts/breakdowns, 122–123
commodity, 41–43
as consensus of value, 64
defined, 90
discounted, 64
of dollar, 50–51
in exit strategies, 232
in fundamental approach, 166
fundamental information incorporated in, 168–169
and interest rates, 36–37
as judge of success/failure, 233
in markup phase, 110–111
oil, 46
patterns of, 268
price-to-earnings ratio, 175–178
range of, 81
relationships among, 21
support/resistance levels of (see Support and resistance)
trends in, 65–66
volatility of, 53–54
Price-to-earnings (P/E) ratio, 175–178
Prime rate, 35
Pro forma earnings, 170
Profitability, circle of, 12
Protective stop orders, 207–209, 233–235
Psychology:
behind patterns, 103
and candlestick patterns, 155
of stock movements, 245
of support and resistance, 120, 122, 125
PV (present value), 32
Q
Quarterly reports, 168
R
Rallies (in decline phase), 116
Range (of data), 77, 81–85, 113
Raw market data, 62–63
Real estate market, 52–53
Realtick.com, 238
Recovery, 18
Reg RD (see Regulation Fair Disclosure)
Regulation, 5, 12–13, 167, 170
Regulation Fair Disclosure (Reg FD), 12–13
Research, 178–179 (See also Bottom-up analysis; Top-down analysis)
Reserve currency, 47
Resistance levels, 120 (See also Support and resistance)
Responsibility for money management, 15, 275–279
Reversal patterns, 146, 148–153
double tops and bottoms, 146, 148–150
head and shoulders patterns, 148, 151–153
Reversals (in trends), 68
Risk, 17
with commodities, 39–40
disutility of, 178
with futures, 211
and setting of initial protective stops, 233
in short selling, 246
systemic, 94
tolerance for, 181
whip–saw, 107
“Run on money,” 5
S
Sarbanes-Oxley Act of 2002, 13
Saudi Arabia, 41
Sears Roebuck Company, 28
SEC (see Securities and Exchange Commission)
Sector analysis, 44–58
Amex Oil Index, 46
currencies, 47–50
Dow Jones Utility Average, 45–46
and effects of interest rates on dollar and gold, 50–51
Fear Index, 53–57
real estate, 52–53
Semiconductor Index, 185, 189–193
in stages 1 and 3, 194–198
in top-down approach, 57–58, 185, 189–194
Securities Act of 1933, 167, 170
Securities and Exchange Commission (SEC), 5, 9, 167, 168
Securities Exchange Act of 1934, 167
“Sell side” firms, 209–210
Selling (see Exit strategies)
Semiconductor Index, 185, 189–193
Sentiment (of market/stock), 161
Shooting star candlestick pattern, 159, 160
Short interest, 246–247
Short interest ratio (SIR), 247, 252
Short selling:
purpose of, 246
stops for, 233
Short squeeze, 245–254
defined, 247
finding candidates for, 248–253
and fundamentals of company, 252–254
identifying level of short position initiation, 249–252
and short interest ratio, 252
terminology related to, 246–247
Short-term interest rates, 19
Sideways movement, 81
Single source liquidity vehicles, 211–214
SIR (see Short interest ratio)
Sizing (of positions), 93–94
Slippage, 204–209
with aggressive orders, 204–206
with passive orders, 206–207
with stop orders, 207–209
Slippage, cost of, 189
S&P 500 Index (SPX), 28–30, 54, 212
Spread, 205
Springsteen, Bruce, 203
SPX (see S&P 500 Index)
Stage analysis (see Market stages)
Stan Weinstein’ charts, <a class="nounder" ull and Bear Markets (Stan Weinstein), 104
Standard deviation, 161
Statistical edge, 58
Steepening (yield curve), 35
Steidlmayer, Peter, 68
Steidlmayer on Markets (Peter Steidlmayer), 68
Stochastic indicator, 161–163, 253, 255–265
buy and sell signals with, 257–261
divergence of price and, 263–265
non-traditional patterns of, 261–263
value of, 255
Stock market:
bond market influence on, 19
bull and bear cycles in, 4
as predictor of recessions, 21
Stock market crash of 1929, 4–5, 167
Stocks:
moving from strong hands to weak hands, 113
moving from weak to strong hands, 108
volatility in prices of, 53–54
Stop limit orders, 209
Stop market orders, 209
Stop orders, 130, 132, 207–209
electronic trailing stops, 238, 240–242
hard-trailing stops, 236, 238, 239
initial protective stops, 233–235
time stops, 244
Strength:
maximum, 81
and volume of trading, 95
Strong hands to weak hands movement, 113
Subjectivity, 103–104
Supply, defined, 89
Supply and demand, 88–90
in markup phase, 110
self-equaling equation for, 89
and support/resistance levels, 122, 124–125
Support and resistance, 119–135
breakout/breakdown clues, 122–126
and moving average, 128, 130–135
resistance levels, 120
and setting protective stops, 233
support levels, 119–120
and trading with trends, 125, 127–129
Support levels, 119–120
Swing traders, 93
Symmetrical triangles, 144, 145
Systemic risk, 94
T
Tails, 81
Take on the Street (Arthur Levitt), 170
Targets, price, 236
Taxes, 213
Technical analysis, 63, 103–118
defined, 64
example of, 215–230
foundations of, 64–66
and market stages, 104–118
moving averages in, 130
probabilities in, 88
subjectivity in, 103–104
top-down approach in, 182
Technical stop orders, 208
Technical Trends (John R. McGinley, Jr.), 46
Technician, 64
Technology:
competitiveness in, 49
for order flow, 211
10-K reports, 168, 170, 174–175
10-Q reports, 174
Tight monetary policy, 23
Time, smoothing of, 93–94
Time stops, 244
daily charts, 182, 183, 185, 186
with moving averages, 132, 134, 135
resistance on, 120
for top-down analysis, 182–188
and volatility, 91
weekly charts, 182–185
Top-down analysis, 17, 181–199
and cost of slippage, 189
logical progression of, 44
market sectors in, 185, 189–194
multiple timeframes in, 182–188
of sectors, 57–58
of Semiconductor Index, 185, 189–193
and trading during stages 1 or 3, 194–198
and trend alignment, 181–182
Trade balance, 47
Trade surplus, 49
Traders:
economists vs., 23
indirect influence of, 210
Trading, 202
example of, 215–230
gambling vs., 61–62
on margin, 213
order flow in, 202–214
taking responsibility for, 15, 275–276
ultimate goal of, 101
Trading strategies, 245–274
breakouts and breakdowns, 122
buy rumor, sell fact (news), 267–274
earnings play, 265–267
short squeeze, 245–254
trading from a flag, 140
Trailing stop orders, 130, 132, 208–209
Trajectories, 136 (See also Patterns)
Treasury notes, 31
in accumulation stage, 108
and Herd Mentality, 182
patterns indicating (see Patterns)
patterns vs., 137
in prices, 65–66
reversals in, 68
within trends, 128
Triangles, 144–147
Trickery, 170
Trough, 19
U
Underwriters, 7
University of Minnesota, 19
Upstairs executives, 203
Up-tick bids, 213
Uptrends, 125, 127, 148 (See also Markup phase (stage 2))
U.S. Justice Department, 9
UTY (see Dow Jones Utility Average)
V
Value:
during distribution phase, 113
Value Players, 108
Velocity, 98–102
defined, 98
and fundamental factors driving price, 101
in markup phase, 111
VIX (see Fear Index)
defined, 53
and smoothing of time, 93–94
in accumulation stage, 108
and attitude of participants, 95, 96
average daily, 189
as confirmation of stock movement, 95
defined, 94
in distribution phase, 113–114
and flag formation, 138
as liquidity measure, 96–98
and pennants, 140
Wal-Mart, 28
Weak hands to strong hands movement, 108
Weekly chart, 182–185
Weinstein, Stan, 104
Whip-saw risk, 107
Window dressing (of portfolio), 175
X
XOI (Amex Oil Index), 46
Y
Yield curves, 34–35
Yields:
bond, 33–35
interest rates vs., 34
Yuan, 47